US Inflation Finally Offers Relief, But There's a Long Way to Go
Comment of the Day

November 10 2022

Commentary by Eoin Treacy

US Inflation Finally Offers Relief, But There's a Long Way to Go

This article from Bloomberg may be of interest to subscribers. Here is a section:

A cooling in US consumer prices offered cheer to households, investors and Federal Reserve officials, but there’s still a long way before high inflation becomes history. 

At 7.7%, annual inflation in October was the slowest since January -- before the start of Russia’s war in Ukraine that triggered a worldwide surge in commodities and pump prices. Even more importantly for the Fed, a closely watched measure that excludes food and energy decelerated by more than economists anticipated.

With slowdowns across categories including food, apparel and used cars, the report suggests that the fastest price increases in decades may finally be starting to ebb in the world’s largest economy. And it probably gives the US central bank enough assurance to moderate its aggressive interest-rate hikes if the trend is sustained.

Eoin Treacy's view

Inflation is rolling over as predicted and it will continue to do so. The pace of tightening this year has been historic in nature and most particularly, the peak in money supply growth was in February 2021. There is a significant lag between money supply growth and tightening conditions and when they show up in the economy. That is now at hand.

The stock market has been liquidity dependent since 2008,  so there has been a substantial response to the potential that the peak in tightening will come sooner rather than later. The most heartfelt desire of speculators is the gravy train of easy money will soon bring bountiful momentum opportunities to the stock market.

The Nasdaq-100 posted an upside key day reversal a month ago but struggled to follow through on the upside. Today’s upward dynamic is further confirmation that the buy-the-dip instinct is returning to dominance.

It is also worth remembering that the lagged effects of the tightening will continue to be a factor for at least another 18 months. There is clear scope for inflation to significantly undershoot. A recession is still inevitable and corporate earnings have a long way to fall. That suggests it would be overzealous to expect the rebound to soon take out the peaks near 16,300 but we could see a substantial reversionary rally.

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